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Earnings season is underway and we preview the Russell 2000 Q3 earnings season in granular detail, providing both aggregate and company-level insights using data from I/B/E/S, StarMine, and Datastream, which are all found in the desktop solution LSEG Workspace.
Earnings Commentary
According to analyst estimates, we expect brighter days are ahead for the Russell 2000 from an earnings growth perspective, as it exited an earnings recession at the beginning of the year.Q3 earnings growth for the Russell 2000 stands at 38.3%, with revenue growth at 1.1%.However, when excluding Health Care, Russell 2000 earnings growth drops significantly to 6.2%, highlighting the sector’s substantial impact. This impact is largely due to easier year-over-year comparisons, as Health Care earnings remain negative at -$6.3 billion, though improved from -$10.2 billion a year ago. This reliance on Health Care’s contribution is further underscored by the modest quarter-over-quarter growth for the entire index, with earnings rising only 1.5% and revenue just 0.1%.All sectors, apart from Health Care, have seen downward revisions in their earnings growth forecasts over the last three months. Energy, Communication Services, and Materials have experienced the most significant reductions.Five sectors including Communication Services, Energy, Materials, Financials, and Information Technology are facing a large negative EPS Predicted Surprise (PS%), signaling that StarMine expects more companies in these sectors to miss on the bottom line. A PS% below -2% is considered significant, and StarMine research indicates that in cases like this, it accurately predicts the direction of the earnings surprise 70% of the time. The large negative PS% also suggests divergent opinions among sell-side analysts, which can lead to increased volatility when companies report earnings, as market reactions may be more unpredictable.Net profit margins at the index level have been declining in recent quarters but are anticipated to rebound later this year, per analyst estimates.The Q3 net margin estimate stands at 2.9%.According to calculations by LSEG Proprietary Research, approximately 28.8% of Russell 2000 constituents are projected to be negative earners in 2024, a figure that drops to 16.9% when excluding the Health Care sector. Looking ahead to 2025, the percentage of negative earners is expected to improve to 23.4% (and further to 11.5% when Health Care is excluded), reflecting a gradual earnings recovery within the index.Looking ahead, analyst estimates suggest a resurgence in earnings in the quarters ahead, with Q4 earnings currently forecasted at $22.9 billion, which marks an all-time high since the creation of the Russell 2000 Earnings Scorecard.Full year earnings growth for 2024 and 2025 are currently expected to rise by 26.2% and 44.2% respectively. The forward four-quarter P/E is 25.9x but falls to 16.3x when excluding Health Care.
Part 1 – Earnings Growth and Contribution
Using data from the October 24th publication of the Russell 2000 Earnings Scorecard, Q3 blended earnings are forecasted at $19.2 billion (+38.3% y/y, +1.5% q/q) while revenue is forecasted at $462.1 billion (+1.1% y/y, +0.1% q/q).Ex-Health Care, y/y earnings growth falls sharply to 6.2%, which marks the first quarter of positive ex-Health care growth since 2023.Exhibit 1 highlights earnings growth contribution, which can be useful compared to simply looking at year-over-year growth rates, as contribution breaks down the actual impact each sector has on overall earnings growth. Eight sectors have positive earnings growth contribution while three sectors have negative earnings growth contribution (Exhibit 1).Health Care has the largest earnings growth contribution of any sector for the fourth consecutive quarter and is forecasted to contribute 27.6 percentage points (ppt). Industrials (9.0 ppt) and Communication Services (6.7 ppt) are the next largest contributors while Energy (-10.9 ppt), Financials (-2.0 ppt), and Materials (-0.7 ppt) are the largest detractors to earnings growth this quarter.
Exhibit 1: Russell 2000 24Q3 Earnings Growth Contribution 
We also examine earnings growth contribution at the constituent level in Exhibit 1.1, highlighting the top 10 and bottom 10 contributors. Cargo Therapeutics is expected to deliver the lion share of earnings growth for Health Care, influenced by an easier year-over-year comparison.CleanSpark and Diebold Nixdorf lead the way for Information Technology, while Clear Channel Outdoor Holdings stands out in Communication Services.The last two columns in Exhibit 1.1 highlight the StarMine Combined Alpha Model (CAM) and StarMine Analyst Revision Model (ARM) scores for each constituent.StarMine model scores are ranked from 1-100 (percentile) with scores above 70 indicating a bullish signal while scores below 30 indicate a bearish signal.Cal-Maine Foods has the highest CAM score out of the group, followed by Adaphealth and Bread Financial Holdings. CAM combines all available StarMine alpha models in an optimal, static, linear combination.Cal-Maine Foods also has the highest ARM score, followed by CleanSpark. ARM is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods.
Exhibit 1.1: Russell 2000 24Q3 Earnings Growth Contribution 
Part 2 – Market Cap vs. Earnings Weights
Exhibit 2 compares the difference between ‘market-cap’ and ‘share-weighted’ weights for the Russell 2000 sectors. The Russell 2000 Earnings Scorecard utilizes a share-weighted methodology.Financials continue to hold the largest earnings weight for the fifth consecutive quarter at 42.0%, significantly higher than its market-cap weight of 18.3%. This discrepancy highlights a substantial earnings weight differential, yet it trades at a discount compared to the overall index with a forward four-quarter P/E of 12.2x.In the Consumer Discretionary sector, there is a noteworthy contrast between market-cap weights and earnings weights. The sector is expected to outperform relative to its market capitalization, with an earnings weight of 19.9% versus a market-cap weight of 9.7%. This indicates that the sector is delivering substantial earnings relative to its size within the index. Additionally, the sector trades at a discount to the overall index, with a forward P/E of 13.3x.In contrast, the Information Technology sector exhibits both a negative earnings and revenue weight differential relative to its market-cap, yet it commands the second highest valuation at 29.4x forward P/E. This discrepancy underscores the sector’s premium pricing, driven by investors’ high expectations for future growth.
Exhibit 2: Market Cap vs. Share-Weight for Russell 2000 Sectors 
Part 3 – Analyst Sentiment and Revisions Heading into Earnings Season
Using the Aggregates app in LSEG Workspace, we can aggregate individual company data to a sector level and overlay various StarMine quantitative analytics, providing an insightful top-down view as shown in Exhibit 3.The first column displays the StarMine, which compares the SmartEstimate© vs. Mean Estimate. The PS% is a powerful quantitative analytic that accurately predicts the direction of earnings surprise 70% of the time when the PS% is greater than 2% or less than -2%. The SmartEstimate© places a higher weight on analysts who are more accurate and timelier, thus providing a refined view of consensus.The SmartEstimate© is also used as an input to many of the StarMine models.Communication Services has an aggregate PS% of -35.2% which highlights that many companies in this sector are expected to miss earnings vs. analyst expectations.Specifically, of the 35 constituents that have a significant PS%, 22 are expected to have a negative PS%. The large negative PS% also suggests divergent opinions among sell-side analysts, which can lead to increased volatility when companies report earnings, as market reactions may be more unpredictable.Exhibit 3.1 highlights the PS% at a constituent level.In terms of Analyst Sentiment, Energy has the lowest Analyst Revision Model (ARM) score of any sector, indicating bearish sentiment from sell-side analysts.Earnings Quality (EQ) measures the reliability and sustainability of the sources of a company’s earnings sources.Consumer Staples has the highest score, approaching a score of 70, which is considered a bullish signal.The Combined Credit Model (CCR) projects the 12-month forward looking probability of default (or bankruptcy) based on equity market data, analyst estimates, company financials, news, and announcements.Real Estate and Communication Services look to have heightened concerns around credit risk with scores of 22 and 23 respectively.
Exhibit 3: Aggregates App – StarMine Analytics for Russell 2000 
Source: LSEG Workspace
Exhibit 3.1: Aggregates App – Predicted Surprise % for Communication Services Sector 
Source: LSEG Workspace
Next, we use the Screener app in LSEG Workspace to identify yet-to-report constituents that have experienced the largest upgrades and downgrades heading into earnings season.Exhibit 4 highlights companies that have seen earnings downgrades, defined by the 60-day mean estimate change in ‘EQ1 Preferred Earnings’. We include a filter to only include companies that have at least five analyst estimates.Preferred Earnings is defined as EPS for most companies except for Real Estate where it can be either EPS or FFOPS depending on analyst coverage.Kura Sushi has seen the largest downgrade in EPS estimates over the last 60 days (-2,071.0%), followed by Delek US Holdings (-1,798.7%), Aspen Aerogels (-481.8%), Lovesac (-466.7%), and PBF Energy (-417.2%). Note: values less than -100% occur when an EPS estimate turns from positive to negative.
Exhibit 4: Largest Negative Revisions for 2024 Q3 
Source: LSEG Workspace
We observe a positive correlation between constituents that have seen a large downgrade and a corresponding negative PS%. Additionally, there is a positive correlation between the mean estimate change and the ARM score, indicating that companies with significant downward earnings revision also tend to have low ARM scores.Examining the PS% and ARM columns can be very useful during earnings season to assess the likelihood of companies beating or missing earnings, while also gauging analyst sentiment.The screener app provides a powerful workflow tool for Analysts and Portfolio Managers, enabling them to parse through hundreds of companies during earnings season to identify thematic trends.Exhibit 4.1 displays the same data for constituents with the largest upgrades heading into earnings season.
Exhibit 4.1: Largest Positive Revisions for 2024 Q3 
Source: LSEG Workspace
Part 4 – Net Profit Margin Expectations
Using data from the Russell 2000 Earnings Scorecard (subscribe here), we examine quarterly net profit margins (Exhibit 5).The Q3 blended net profit margin estimate has fallen gradually over the last three months by 70 basis points to a current value of 2.9%.Over the past three months, eight sectors saw its net margin estimate decline. Energy experienced the largest decline in margin expectations (-354 bps, current value: 2.0%), followed by Real Estate (-112 bps, 1.4%), and Communication Services (-94 bps, 0.0%).The 2024 and 2025 full-year estimates are currently 3.1% and 4.3%, respectively, while the forward four-quarter estimate is 4.0%.
Exhibit 5: Russell 2000 Net Profit Margin Expectations 
Part 5 – Forward P/E & PEG Ratio
Using LSEG Workspace, the forward 12-month EPS is currently $85.40 per share, resulting in a forward P/E (time-weighted) of 25.9x.The 2024 and 2025 EPS estimate of $66.10 and $92.35 per share have declined by 17.8% and 12.8% respectively over the last six months (Exhibit 6). In comparison, the Russell 2000 price index has risen by approximately 16.1% over the same period.Using Datastream, The forward P/E of 25.9x has increased over the past three months and now ranks in the 88th percentile since 2002, offering a 3.6% premium to its 10-year average. For reference, the trough forward P/E during the last two recessions were 13.2x (Nov 2008) and 16.1x (March 2020).The ‘PEG’ ratio currently stands at 1.66x, ranking in the 79th percentile since 2002 and representing a 2.6% premium to its 10-year average.
Exhibit 6: Russell 2000 EPS Estimates 
Conclusion
Earnings expectations for the quarters ahead are high, with a forward P/E ratio nearing the top decile of the past 20 years. However, excluding the Health Care sector, earnings growth sharply declines to 6.2%, suggesting less strength in the broader index than it might initially appear. This is particularly noteworthy given the modest quarter-over-quarter growth this quarter, with earnings rising just 1.5% and revenue just 0.1%More By This Author:S&P 500 Earnings Dashboard 24Q3 – Tuesday, Oct. 29
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